The nine companies turned the 2002 pension plan
losses into gains on their annual report by
computing 2002 pension earnings based on average expected
rates of return of 9.2%.
However,the pension funds actually suffered losses
averaging 9.3% in 2002 and 7.97% in 2001, according to an
analysis by Bloomberg . While the firms
have reduced their 2003 expected returns to an
average of 8.58%, as a result of the accounting standards
under FAS 87, the corporations legally transformed
$30.61 billion of pension losses into pretax earnings of
$7.9 billion, according to the report.

That financial alchemy was done using
“smoothing” provisions in the accounting rule,
which
allows companies to take certain assets and obligations off
balance sheets and amortize them as income or expenses over
time. Additionally, companies are allowed to
report the expected return on assets, instead of actual
losses and gains (See
Smooth Move
).

None of the nine companies with billion-dollar
pension losses were required to disclose the actual
amount of losses in the management discussion and
analysis section of their annual reports. Rather, the
losses were included in footnotes to financial statements
in the reports, the Bloomberg analysis found.

The Financial Accounting Standards Board (FASB), the
United States’ accounting rulemaking body, is well aware of
the concerns surrounding FAS 87, recently voting to add
pension accounting to its formal review agenda (See
FASB Agrees To Look At Pension
Accounting
).
The move comes in
response to a plethora of complaints about current
pension accounting standards, and will focus specifically
on how to enhance companies’ disclosure of their pension
finances.

Can You Hear Me Now?

Verizon was the biggest beneficiary among the nine
that Bloomberg analyzed. In fact, its pension fund
accounted for 40% of its 2002 pretax earnings of $6.2
billion.The company reported a $2.5 billion gain from the
pension fund, under FAS 87, even though the fund actually
lost $4.68 billion on its investments. The expected rate of
return was positive 9.25%, while the actual return was
negative 9.63%.

However, change may be in the air.
In December,
Verizon announced 2003’s earnings estimates will be
lower, hit by a decision to expense stock options and a
reduction in earnings derived from pension investments
(See
Options, Pensions To Clip Verizon 2003
Earnings
).

Additionally, the telecommunications company, in
response to shareholder requests, agreed to take pension
income out of formulas used to determine executive
compensation (See
Verizon Tossing Out Pension Income in Exec
Compensation
).The situation is very similar to another large
company that is sharing space on Bloomberg’s list: General
Electric (See
GE Reworks Executive Compensation
Structure
).
General Electric also explained the change was
brought on by advocacy groups, concerned that pension
income is not actual income on the pension investments.